Did the offshore-drilling exemption apply when the platform and wellhead were outside Texas waters but the wellbore entered Texas territory?

Plain-English summary

An offshore platform and its wellhead sat entirely outside Texas waters, but one wellbore crossed into Texas territory beneath the ocean floor. The Comptroller said the exemptions in Texas Tax Code § 151.324(a) and Rule 3.332 applied only when exploration or production took place offshore exclusively outside Texas territory.

Because the well's exploration and production occurred both inside and outside Texas, the exemptions did not apply. The purchaser owed tax on equipment and other tangible personal property used with the well. Property originally bought tax-free under an exemption certificate also became taxable if used for exploration or production inside Texas territory.

What this means for you

The surface location of the platform or wellhead did not decide the exemption by itself. The territorial path and use of the well mattered.

Common questions

Did an out-of-state platform and wellhead qualify automatically? No.

Why was the exemption denied? The wellbore entered Texas territory, so the activity was not exclusively outside Texas.

What if equipment had already been bought tax-free? Using it for exploration or production inside Texas triggered tax on the purchase price.

Citations and references

• Texas Tax Code § 151.324(a) — offshore exploration or production exemption cited by the letter
• 34 Tex. Admin. Code Rule 3.332 — implementing rule cited by the letter

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9104L1096G07

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

JOHN SHARP
Comptroller April 2, 1991

Dear **:

Thank you for your recent letter. You describe a situation
in which certain equipment is delivered to an offshore
drilling platform located entirely outside Texas waters.
Some of the wells that run from the platform are located
entirely outside Texas waters. In at least one well, the
wellhead is entirely outside Texas territorial limits, but
the wellbore crosses over and enters Texas territory beneath
the ocean floor. As I understand it, you wanted to know how
this affects the exemptions set out in Tax Code Section 151.324 (a)
and Rule 3.332.

The exemptions apply only when the exploration or production
takes place offshore, exclusively outside Texas territory.
With regard to the well you describe, the exploration and
production will occur both inside and outside Texas
territory. Therefore, the exemptions do not apply.

The purchaser must pay tax on equipment and other tangible
personal property that will be used in connection with this
well. If equipment and other tangible personal property
that was purchased tax free with an exemption certificate is
used in connection with exploration or production inside
Texas territory, the purchaser owes tax on the purchase
price.

This opinion is based on the facts presented. Different
facts, though similar, might lead to different answers. if
you have further questions, feel free to write or call
1-800-252-5555. My extension is 3-3889.

Sincerely,
John Christian
Tax Administration